11A
Appendix
Monopolistic Competition and
Oligopoly
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Additional Game Theory Applications
• Game theory explains mutual
•
interdependence and strategic
behavior
Collusion is beneficial to participants
• Reduced uncertainty
• Increased profits
• May block entry
LO8
11-2
A One-Time Game: Strategies
• A one-time game
• A simultaneous game
• A positive sum game
• A firm’s dominant strategy
LO8
11-3
A One-Time Game: Strategies
• Nash Equilibrium
• Outcome from which neither firm
wants to deviate
• Current strategy viewed as optimal
• Stable and persistent outcome
LO8
11-4
A One-Time Game
Dramco’s Price Strategy
LO8
National
International
International
Chipco’s Price Strategy
•2 competitors
•2 price strategies
•Each strategy
has a payoff
matrix
•Independent
actions stimulate
a response
A
$11
National
B
$11
C
$5
$5
$20
$20
D
$17
$17
11-5
Credible and Empty Threats
• Credible Threats
• A statement of coercion that is
believable by the other firm
• Can establish collusive agreements
• A strong enforcer can prevent cheating
• Can generate higher profits
• May be countered with threat by rival
• Empty Threats
• A threat that is not believable by rival
LO8
11-6
Repeated Games
• Game that recurs
• May cooperate and not compete
•
•
LO8
strongly
Rival reciprocates
Examples: Pepsi and Coke, Walmart
and Target, Boeing and Airbus
11-7
LO8
ThirstQ’s Advertising Strategy
Promo Budget Normal Budget
Promo Budget Normal Budget
A
$10
B
$10
C
$8
$8
$16
$16
D
$12
$12
Normal Budget Promo Budget
ThirstQ’s Advertising Strategy
2Cool’s Advertising Strategy
Normal Budget Promo Budget
2Cool’s Advertising Strategy
Repeated Games
A
$11
B
$11
C
$10
$10
$14
$15
D
$13
$13
11-8
First-Mover Advantages
• The firm that first moves:
• May be better prepared
• May preempt entry of rival
• Rival must respond
LO8
11-9
First-Mover Advantages
Big Box strategies
Don’t build
LO8
Build
A
Don’t build
Huge Box strategies
Build
-$5
B
-$5
C
$0
$0
$12
$12
D
$0
$0
11-10